November 3, 2010: Elections…Fed….Jobs
November 3rd, 2010
Index Year-to-date Trailing 52 Weeks
Dow 30 +7.29% +12.46%
S&P 500 +7.04% +10.37%
Naz 100 +15.66% +22.71%
Ru 2000 +13.99% +16.22%
S&P 400 +15.30% +19.44%
S&P 600 +13.84% +18.35%
Dow Trans. +17.54% +22.22%
As investors prepare for the much-anticipated release of the FOMC’s latest attempt at stimulating the economy which will be unveiled this afternoon at approximately 2:15, the markets are starting to digest the meaning of the seismic shift in the nation’s political power structure that occurred last night. So far, according to the almost non-existent market reaction, that power shift appears to have been priced in.
For the past several weeks, investors have been soothed by promises from the Beltway for more and persistent “accommodative measures” that will be provided “for an extended period of time”. Any market analysis that is concerned with stubbornly high unemployment and under-employment, lackluster growth, global debt and deficits, and so on, has been quickly put to rest by well-timed Fed statements that more help is coming.
Based on price performance, investors simply have thrown up their hands and bought..…a little bit of everything. In the days leading up to yesterday’s mid-term elections, a growing chorus of tele-strategists and cyber-analysts have been postulating that the market may be setting up for a “buy-the-rumor and sell-the-news” kind of reaction. As more and more people think that will happen, we think that scenario is increasingly unlikely to develop. The market has an insidious and unmerciful habit of doing precisely what frustrates the largest number of people.
October ADP Employment came out this morning and showed that 43k private sector jobs were added last month. Also, September was revised up from -39k jobs to -2k jobs. In the report, an ominous declaration was made.
Employment gains of this magnitude are not sufficient to lower the unemployment rate. Given the modest GDP growth in the second and third quarters, and the usual lag of employment behind GDP, it would not be surprising to see several more months of lethargic employment gains, even if the economic recovery gathers momentum.
That language, in the bizarro stock market world of bad news = good news, could easily lay the groundwork for a far more accommodative Fed which argues for continued upward price pressure….for now.
The question, however, will soon become, “How much more accommodative can the Fed get?”
From purely an investor psychology perspective, we think the market could surprise “the crowd” and attempt a rally from current levels. If that occurs, a massive short-covering effort would likely develop. We would aggressively sell into such a move.
Longer-term (Q1-Q2 2011) we see risk for the S&P 500 down to a minimum of 1014. That is a 61.8% downside retracement (38.2% upside retracement) of the October 2007-March 2009 decline. Interestingly, 2010’s low is 1010.91 (July 1). We think until the index convincingly clears 1228.74 (61.8% upside retracement of October 2007-March 2009’s decline), there is substantial technical risk to the downside.
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S&P 500
September 22nd, 2010
· On September 13, the index traded up through 1120 for the first time since August 10 and is once again challenging the upper region of a trading range that has been in force since May 19, 2010. Since that day, the index has traded between 1131.23 and 1010.91. The low end of that range came on July 1 and is the current 2010 low.
· Also on September 13, the index traded up through its 200 Day Moving Average (1115.91) for the first time since August 11. On May 6, 2010, the index traded down through the Average for the first time since July 13, 2009 when the index was at 875.32. After May 6, the index has spent twelve days entirely above the Average and sixty days entirely below the Average.
· Since May 6, the largest margin above the Average reached was 6.75% (May 13) and the largest margin below the Average reached was 9.37% (July 1).
· There are several key technical levels that the index is wrestling with that could attract substantial selling interest. 1097.82 is the 10% correction level relative to April 2010’s bull market peak. May 6 was also the first time in the current market cycle that a 10% correction had been posted for the index. Since May 6, although to a slightly lesser degree than the 200 Day Moving Average, the index has spent far more time below 1098 than above it.
· 1115.36 and 1140 are respective 50% and 61.8% upside retracements of 2010’s range. 1131.23 was the short-term peak from June 21 from which a nine-day, 10.7% decline developed that produced 2010’s low. We believe the index is now testing a major resistance barrier (1097-1140) and that a downside resolution of this test is very strong possibility.
August 23, 2010: If the VIX was a Stock
August 23rd, 2010
Traders use the level of the VIX (CBOE Volatility Index) as a validating gauge on whether a market move is normal or extreme. According to the CBOE’s website, the VIX is a “key measure of market expectations of near-term (thirty day) volatility conveyed by S&P 500 stock index option prices.” This index is generally known as “the fear gauge”. Rising levels are considered increasingly bearish and falling levels are considered increasingly bullish as option traders’ aggregate bets are continuously assessed.
Through a mathematical calculation, the level of the VIX is intended to predict the expected percentage move of the S&P 500 over the next thirty-days. Currently, the VIX is 25.61 which says that option traders (at the moment) expect the price of the S&P 500 to move up or down by 2.61% in the next thirty days. Since the VIX is a rapid interpretation of the near-term trend based on positions already taken by option traders, that interpretation can quickly change and is somewhat of a lagging indicator.
Looking at the price trend of the VIX from a technical perspective, it appears to be suggesting higher prices (a bearish indicator for underlying S&P 500). 2010’s low came on April 12 at 15.23. This ”trough” came ten days before THE cycle high for the S&P 500. During that ten days, the index rallied 2.1% but abruptly reversed into a nine-week, 17.1% decline.
Since April’s low, the VIX set a higher low at 21.36 on August 9.
2008’s low for the VIX came on May 19 at 15.82 which was followed by a higher low on August 22 at 18.64. On May 19, the S&P 500 peaked at 1440.24; a lower high than 2008’s high (January 2 at 1471.77). From the May 19 peak in the S&P 500 (low for the VIX), the index accelerated into a ten-month, 53.7% decline.
The current rising trend for the VIX is a strong indication that option traders are beginning to position for a significant negative reversal in the S&P 500.
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August 16, 2010: Macro Reflections
August 16th, 2010
There was one bank failure last week which brought 2010’s total to 110 with a cost to the FDIC Insurance Fund of $19 Billion. At this point in 2009, there had been 77 banks seized by regulators with an Insurance Fund cost of $18.34 Billion.
Approximately fifty-days after the end of each quarter (that would be August 24), the FDIC publishes its Quarterly Banking Profile. In that very detailed report, the “problem bank” list is updated. At the end of Q1, there were 775 banks on that list, (up 10.4% from the previous quarter and up 154% from the end of Q1 2009). Assets for banks on that list were $431 Billion at the end of Q1 (up 6.9% from the previous quarter). The report can be found at .
While that is a lot of percentages and statistics and those data can be interpreted a lot of different ways, we believe that the information in the upcoming report represents yet another substantial psychological hurdle for the market to work through. So far, the assumption has been that the FDIC (and other government agencies) will continue “assisting” the financial sector with a variety of supposedly stimulative measures.
Conventional wisdom holds that Financials generally lead the broad market trends. Looking at the S&P Financials, the past five days have produced a decline of 5.45%; the worst performance of any S&P sector. Over the trailing 52 weeks, the sector is also the weakest (-0.12%) out of the major S&P sectors and the only one with a loss during that period.
Another interesting development in the sector is that money flow has been somewhat concentrated. Out of the eighty names in the index, thirty-three are above their respective 200 Day Moving Averages. Of that thirty-three, nine of the top ten names in term of margin above their Average are real-estate related names. Investors are clearly making a bet that either the general real estate market has fully recovered and no more bad news is coming or that Federal stimulus into the sector will continue for a long time to come.
Those nine names and the margin of extension above their respective 200 Day Moving Averages are: AVB +15.61%, EQR +15.36%, CBG +14.21%, PSA +12.21%, AIV +11.46%, BXP +11.26%, VNO +10.97%, SPG +10.52%, HCP +9.40%.
Any policy shift in terms of interest rates or government’s active role in capital markets could have a significantly negative impact on Financials in general and specifically the names above.
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